The United States is the largest and one of the most vibrant venture capital markets in the world. In 2021, venture capitalists invested $329.9 billion in over 17,000 deals, according to the National Venture Capital Association (NVCA).
NVCA has also reported that total 2021 exit value - which is the cash venture capital investors receive when VC-backed companies are acquired or go public - was over $774 billion.
Venture capital investing isn't for the fainthearted. The venture capital business model is governed by what is usually called the "power law," which holds that out of every ten early-stage investments VC investors make, two will produce all the returns they earn. The other eight investments will generate little or no returns, and some will completely fail.
A successful venture capital investor is like a baseball power hitter who hits home runs, but also strikes out a lot.
So, why am I discussing venture capital in a blog about B2B marketing? Because the venture capital model can help marketing leaders make better decisions about how to manage a small but important part of their marketing budget.
The Revenue Allocation Challenge
The most important and difficult decisions marketing leaders must make inevitably involve the allocation of marketing resources (money, people, time, etc.). Regardless of company size, the resources available for marketing are rarely (if ever) sufficient to enable marketing leaders to do everything they'd like to do. Therefore, resource allocation is an intrinsic part of every significant marketing decision.
Resource allocation decisions can be difficult for a host of reasons, but one of the greatest challenges marketing leaders face is the need to deploy their resources to both maximize performance in the present and build a solid foundation for success in the future.
To increase the odds of achieving future success, marketing leaders need to consistently invest in programs that are specifically designed to identify the capabilities, tactics and other innovations that may become critical for effective marketing in the future. But the reality is, there is a strong tendency to prioritize investments that will produce short-term benefits and to underinvest in activities whose benefits are delayed or uncertain.
The 70-20-10 Rule
Fortunately, there's a resource allocation "rule of thumb" that can help marketing leaders overcome this strong human tendency. It's called the 70-20-10 rule (or sometimes the now-next-new rule), and it's been used for a variety of business purposes. Many companies have used it to allocate innovation resources, and Coca Cola reportedly used a version of the rule for years to guide marketing investment decisions.
Here's how the rule works.
The 70 ("Now") - The rule states that 70% of your marketing resources should be devoted to capabilities and programs with a proven performance track record. This will typically include the marketing channels, tactics and technologies you're already using. The primary goal of these capabilities and programs is to drive short-term performance.
The 20 ("Next") - The rule provides that 20% of your marketing resources should be allocated to emerging marketing channels, tactics and technologies. This category would include capabilities and practices that a growing numbers of other companies are successfully using. It would also include marketing channels or tactics that you have previously tested in small pilot programs and now want to use on a broader basis.
The 10 ("New") - The remaining 10% of your marketing resources should be invested in new capabilities and techniques that have just appeared on the scene. This category would also include the investments you make to test new creative concepts, value propositions or customer segments.
Use a Venture Capital Mindset
One of the main benefits of the 70-20-10 rule is that it prompts marketing leaders to consistently allocate part of their marketing budget to the development and testing of new marketing strategies, capabilities and techniques.
The 10% investment category funds the activities that drive true marketing innovation. In fact, this "bucket" of activities and investments can be accurately described as a company's marketing innovation incubator.
But . . .
The marketing activities in the 10% bucket are by definition new and unproven, and therefore they are high-risk undertakings. These activities are inherently experimental, and, as we all know, experiments aren't always successful.
That's why marketing leaders should use a venture capital approach when selecting and managing the activities in the 10% bucket. Venture capitalists recognize that, no matter how much research and other due diligence they perform, they can't accurately predict which of the companies they invest in will turn out to be big winners. They understand that most of their portfolio companies won't produce significant returns, and they view this high "failure" rate as part of the cost of reaping the benefits produced by the winners.
Marketing leaders should adopt a similar mindset when thinking about the activities and investments in the 10% bucket. Many of these activities and investments probably won't be highly successful, but some of those that are can potentially produce exceptional marketing results.
Image courtesy of Vall d'Hebron Institut de Recerca VHIR via Flickr (CC).
David, your article is exactly right. You can’t always accurately predict what will, or will not, produce good results. I made it a point to allocate 5-10 percent of my B2B marketing budget to testing new techniques, media, etc., or as you put it, the marketing innovation incubator. And yes, I am prepared to accept less than stellar results on these activities, as long as I learn something important in the process.
Be careful how you assess what is “working for others.” Just because a lot of money is being thrown at intent data (for example) doesn’t mean it is working for everybody. I also recommend that 10 – 20% should be spent going back to basics. The basics are direct, person-to-person communication. Far too much investment is being put into “digital transformation” and I can tell you from personal experience that it is not working – in companies large and small. Not that “digital transformation” is bad or wrong, it just isn’t implemented very well. The box gets checked, there is not enough training and change management behind the various solutions, and senior managers are on to the next box to check. There is an astounding amount of money being thrown away by companies today (and yesterday.) I argue that companies should be using a 60-10-Zero model. Save 30% of the current spend and invest 10% in direct to buyer communication.